In the U.S., religious practices have an unclear relationship to the tax code. Sam Brunson, a professor at Loyola University Chicago School of Law, has an idea to give some structure to the way policy makers deal with that relationship.
Congress historically writes religious accommodations into the tax code on a case-by-case basis: A group of people appears with a specific tax problem, and lawmakers decide whether to write a fix.
But what if there were a framework that would help them consider the problems consistently and fairly? Brunson proposes such a framework in his book, “God and the IRS: Accommodating Religious Practice in United States Tax Law.”
Discussing it with Bloomberg Tax legal reporter Aysha Bagchi, he says the government will surely continue to grant accommodations. The question is “will they be thoughtful, or will they continue to be ad hoc?”
Siri: From Washington, this is Talking Tax. I’m Siri Bulusu. This week we talk about how religion can impact tax policy.
Islamic finance doesn’t allow for interest payments, and the Amish community has rules about paying into Social Security, and all of that has tax implications. Sam Brunson, a law professor at Loyola University in Chicago, thinks that policy makers should allow for certain exceptions for each of these communities.
In his book, “God and the IRS,” he lays out a three-question framework when considering tax exceptions based on religious practice.
Legal reporter Aysha Bagchi sits down with Sam this week to discuss.
Aysha: So we’re here with Sam Brunson today, who’s joining us from his office in Chicago. Hey Sam, thanks for joining us on the show.
Sam: Thanks for having me.
Aysha: I’m really excited to dig into your book today, “God and the IRS,” all about when the government should or shouldn’t grant tax accommodations for religious practices. In it, you develop a three-question framework for policy makers to think about whether to provide a tax accommodation. What does this framework look like?
Sam: So under the framework it asks, like you said, three questions. The first is: Does an individual’s religion cause them to act in a tax disadvantaged way. The second is: If it does, what kind of accommodation would put them in a similar after-tax position as someone without the religious constraints. And third, it asks whether there’s an extrinsic reason not to grant the accommodation.
The first one--does an individual’s religion caused them to act in a tax-disadvantaged way. Maybe I’m religious and I say because of my religion, I don’t want to and I shouldn’t pay taxes, because I don’t recognize the legitimacy of the government. And I can say that, and for religious reasons I may even believe that, but this doesn’t put me in a tax-disadvantaged position, because everyone who has income is obligated to pay taxes. The fact that I don’t want to, that I don’t believe in paying taxes, doesn’t put me in a tax-disadvantaged position.
The flip side is … for instance, some Muslims believe that Islam forbids them from paying or receiving interest. Now we know, all of us who are homeowners know, that when we pay our mortgage payments, we can deduct the interest portion of those. If you’re not paying interest, though--if you’re paying an interest-equivalent amount--then you don’t get the deduction.
So a Muslim borrower—a Muslim homeowner—is going to be in a tax-disadvantaged position. So the second question is: What kind of accommodation would put them in a similar after-tax position as me? When I wrote that question, I was thinking about maybe administratively it’s too complicated to enforce or maybe it would represent a huge revenue loss. I can’t find an extrinsic reason not to grant the accommodation. Muslims make up significantly less than 2%, and I think even less than 1%, of the U.S. population.
So whatever revenue loss there is, it’s going to be insubstantial. Moreover, whether you consider it good policy or not, Congress has made the policy decision that mortgage interest should be deductible for homeowners. So it doesn’t seem like there is any compelling reason not to do this.
Aysha: What’s the benefit in your mind of having this kind of framework in place?
Sam: The benefit is more than anything that it would force lawmakers—I guess it wouldn’t force lawmakers, but it would at least encourage lawmakers—to think through systemically what they’re trying to do with the tax law. It would give them some basis for deciding when an accommodation makes sense, when an accommodation doesn’t make sense.
I have another example in the book, of an accommodation that Congress has granted, unlike the one that I proposed which they haven’t granted, that doesn’t strike me as making sense, which is the parsonage allowance. That is: Under the tax law, when a minister of the gospel is the term that it uses, but basically when clergy receives housing or a housing allowance from the religious organization that they work for, they don’t have to include that in their gross income.
Whereas for the vast majority of us, if we were lucky enough that our employer provided us with housing, the fair market value of that housing would be included in our gross income. Now, there are questions about the constitutionality that have recently been resolved. At least in the Seventh Circuit. There are questions about whether it’s a good policy idea.
But if you look at it, being clergy doesn’t pass the first question in the framework…that is being clergy, whether you’re clergy or not, you need housing and there’s no intrinsic reason why your religious beliefs would require you to receive untaxed housing from your religious employer. So that particular policy, if they had gone through this framework, I believe wouldn’t have met the first step, much less the second, which is by granting them tax-free housing, it actually puts them in a better after-tax position than someone who’s not religious.
If my employer pays me $80,000 cash and gives me $20,000 of housing, I pay taxes on $100,000. And if I’m at a 22% marginal tax rate, say that gives me $78,000 after taxes. If I were clergy, though, and I get paid $80,000 cash, $20,000 of housing, I can exclude the housing and I’m paying my 22% tax on just $80,000. So after taxes, I have more purchasing power than I would if I weren’t clergy. So I think that having a framework like this would help policy makers and help lawmakers think about what they’re doing, why they’re doing it, and how it ends up coming out, whether they should do it or not.
Aysha: You write that people don’t always expect that tax accommodations are an issue for people with religious practices. Can you explain what you mean?
Sam: I mean, people make economic choices for all sorts of reasons, and it turns out that sometimes they make their economic choices because of their religious beliefs. The easiest example is for most people, their religious beliefs maybe not caused them, but at least encouraged them to make religious donations--to pay a tithe or to otherwise purchase religious products or do things like that. So in certain circumstances, religious people might be making economic decisions based on their religion that non-religious people wouldn’t make because they don’t have the same impetus.
Aysha: Some people might say that providing tax accommodations for religious practice is just too messy or could even produce abuse. Do you see those things as risks here?
Sam: They are risks, but I think in the real world they’re risks that we have to take. Religion has special constitutional protections. It has a special place in the American history, in the American psyche.
I think Congress will continue to be attuned to the needs of and desires of religious people. So I think that religious accommodations will continue in the tax law. And the only question is, will they be thoughtful or will they continue to be ad hoc?
Aysha: What are some of those risks? Can you talk about that a little bit of messiness or abuse, or that sort of thing?
Sam: I think the big risks are more than anything unfairness. I think there is the possibility for abuse. There is history of universities--religiously affiliated universities--providing a housing allowance to their non-clergy faculty. Whether in some cases it is their religion professors, but in some cases it is even chemistry professors or basketball coaches or other people, that even if we agree with the parsonage allowance, don’t seem like the kind of clergy that it was aimed at with that. With that again, there is the risk that a wealthy mega-church pastor will claim a parsonage allowance on the value of his multimillion-dollar house.
So there’s a risk of both actual unfairness in the appearance of unfairness. There’s also a risk of just escalation. I think according to Pew, something above 70% of Americans are religious. And if those 70% continued to demand accommodation and continued to get their tax bill lowered by virtue of being religious, that means that the remaining 25 or 30% of Americans who aren’t religious, or the number of Americans who aren’t religious that qualify for an accommodation, are going to have to bear a larger percentage of the tax burden. So every time we grant a tax accommodation, that means some subset of people are paying less in taxes, and the less that they pay has to be made up either by other people paying more in taxes or by the government cutting the amount of services that it provides.
Aysha: What would you say to someone who says: “Hey, you shouldn’t provide any tax accommodations for religious practice at all because it’s unfair to people who aren’t religious?”
Sam: I don’t entirely disagree, though I don’t entirely agree. But I would say that whatever you think about that, in the near-term future at least, that’s an unlikely state of the world. I’d say that as a political matter, we’re unlikely to stop granting at least some tax accommodations and to the extent that those are going to be granted, I feel like it’s better for them to be thought through, careful, and narrowly tailored than to just be whatever it is that people want.
Aysha: What do you see for the future of tax accommodations of religious practice? Are you optimistic for your project here?
Sam: I like to be hopeful. I think the problem with this becoming super influential is that the question of tax accommodation comes up rarely and comes up in fits and starts. So currently there is a move—the 2017 tax cuts and jobs changed the things that you have to do to get the child tax credit, including it requires now that children for whom you claim a child tax credit have to have a Social Security number.
And returning to the Amish, at least some Amish are religiously opposed to Social Security numbers, which means that they don’t get the benefit of an up to $2,000 per child tax credit for their children. Instead, they’re limited to taking, I believe it’s a $500 tax credit for dependence. And I know, I have heard that there’s lobbying about that. I’ve heard there are attempts to change that. And honestly that seems unfair, especially since the tax law—the expanded child tax credit--was meant to make up in part for the loss of personal exemptions.
So if personal exemptions are gone and the Amish are now unable to take the expanded child tax credit, that means that the tax law change imposed an excessive burden on the Amish by virtue of doing something that wasn’t meant deliberately to attack the Amish. It was meant honestly to attack undocumented immigrants, which again, I’m not saying that’s a good thing. I think that’s a terrible thing, but this was an unanticipated consequence of a move that Congress made. So granting an accommodation would put them back in a position similar to other taxpayers. And I agree that it’s unfair to put religious individuals in a position better than other taxpayers, but I also think it’s unfair to leave them in a worse position, where they have a sincere religious belief that doesn’t allow them to take advantage of provisions of the tax law that are available to other people.
Aysha: Thanks very much, Sam, for joining us. This was really interesting to talk about today.
Sam: Thank you. It was fun talking to you.
Siri: For more tax and accounting news, visit news.bloombergtax.com and you can find us at @tax on Twitter. From Washington, thanks for listening.